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Dynamic Price Discrimination and Quality Provision Based on Purchase History

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  • Sun, Ching-jen

Abstract

This paper develops a general two-period model of product line pricing with customer recognition. Specifically, we consider a monopolist who can sell vertically differentiated products over two periods to heterogeneous consumers. Each consumer demands one unit of the product in each period. In the second period, the monopolist can condition the price-quality offers on the observed purchasing behavior in the first period. In this setup, the monopolist can price discriminate consumers not only by quality, but also by purchase history. Several interesting results are derived. First, we fully characterize the monopolist's optimal pricing strategy when there are two types of consumers, and a simple condition is given to determine whether the monopolist will price discriminate by quality in the first period. We compare it to the case when there is no customer recognition or the firm is able to commit to its future actions. When the type space is a continuum, we show that there is no fully separating equilibrium, and some properties of the optimal contracts (price-quality pairs) are characterized within the class of partitional PBE.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 9855.

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Date of creation: Oct 2007
Date of revision: Aug 2008
Handle: RePEc:pra:mprapa:9855

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Related research

Keywords: Price discrimination; Supermodularity; Submodularity; Behavior-Based Pricing; Ratchet Effect; Bunching;

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  1. Justin P. Johnson & David P. Myatt, 2003. "Multiproduct Quality Competition: Fighting Brands and Product Line Pruning," American Economic Review, American Economic Association, American Economic Association, vol. 93(3), pages 748-774, June.
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  17. J. Miguel Villas-Boas, 1998. "Product Line Design for a Distribution Channel," Marketing Science, INFORMS, INFORMS, vol. 17(2), pages 156-169.
  18. Stokey, Nancy L, 1979. "Intertemporal Price Discrimination," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 93(3), pages 355-71, August.
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  20. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 6(4), pages 877-897, December.
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